1. INTRODUCTION

Welcome to the Smart Homeowner! This software program is intended to help you

make the right decision on the various financial choices you face in the

process of buying or owning your home. Your best decisions will include both

subjective and numerical considerations. For example, while deciding on the

mortgage loan, you choose a loan broker based on a recommendation( subjective

consideration) but you decide on a higher initial cost mortgage in exchange

for lower mortgage rates (numerical consideration). This program will guide

you to better decisions based on numerical considerations only. In other

words, this program will guide towards the decision that will save you more

money in the long run. There are several excellent books dealing with

subjective considerations during the decision making process. Check in your

local library in their residential real estate section. Your final decision

should be a blend between these considerations.

Most decisions faced by the home buyer(or owner) is usually a "which is

better?" kind of question such as which of two loans to choose, should you

buy or rent etc. etc. Accordingly, most modules in this program is geared for

two sets of input, with the answers presented by the computer indicating

which is better. Some other decisions involve looking at payment/cost

structures after a decision has been made. Some modules in the program will

handle such cases.

Since a home is the probably the biggest investment you will make in your

lifetime, a wrong decision may cost you many thousands of dollars. A few

hours of your time on your personal computer along with this program could

reap substantial financial benefits. It is with this philosophy that IEG

Consultants developed this software, and we hope you find it friendly and

useful.

2. FEATURES

The Smart Homeowner is designed to work in (a) Buyer mode and (b) Owner

mode. The buyer mode contains functions that are likely to be of interest to

the prospective home buyer. The owner mode contains functions that are

likely to be of interest to the home owner and prospective home seller. The

following are the questions that the Smart Homeowner is designed to answer.

- Given my finances, what is the maximum price of a home that I can afford ?

- Should I buy a home or should I rent the home ?

- Given a mortgage loan, what will my payment structure look like ?

(amortization tables)

- Which of two loans should I choose over a certain time horizon ? What if I

extend/shorten my time horizon ?

- How much should I prepay my mortgage so that I can end my mortgage loan by

a certain date ?

- Reverse mortgage amortization

- Should I prepay enough to my mortgage balance to eliminate PMI ?

- Should I refinance an existing loan ?

- Should I assume an existing mortgage or take out a new one ?

- Should I take out a home equity loan or refinance to a larger first

mortgage ?

- Should I sell my home or rent it ?

- What is the true interest rate on my mortgage loan ?

3. MINIMUM REQUIREMENTS TO RUN PROGRAM

You need an IBM PC or compatible running MS-DOS or PC DOS 2.0 or higher.

4. BACKING UP MASTER COPY

If you have two floppy disk drives A and B of the same format,

Place the Smart Homeowner disk in drive A. Close drive door.

Place the backup disk in drive B. Close drive door.

If you are not at the A:> prompt, type "A:" and <ENTER>.

Type "COPY *.* B:" and <ENTER>.

If you have either one floppy drive A or two drives of different formats(e.g

5 1/4" and 3 1/2" sizes),

Place the Smart Homeowner disk in drive A. Close drive door.

Type "DISKCOPY A: A:" and <ENTER>. You will be instructed to sequentially place

the master and backup disk in the A drive.

If you have a floppy disk drive A and a hard disk drive C,

Place the Smart Homeowner disk in drive A. Close drive door.

If you are not at the C:> prompt, type "C:" and <ENTER>.

Choose a directory where you would like to store the software, or create a

new DOS directory.

Type "COPY A:*.*" and <ENTER>.

You should store the original disk in a safe place, shielded from heat, dirt

or magnetic fields.

5. STARTING THE SMART HOMEOWNER

From a floppy disk drive (either A or B),

If you are not at the floppy drive prompt, type "A:" and <ENTER>.

Type "HOME" at the DOS prompt.

From a hard disk drive,

If you are not at the hard drive prompt, type "C:" and <ENTER>.

Type "HOME" at the DOS prompt.

Since the Smart Homeowner runs much faster on a hard disk drive compared to

a floppy disk drive, you should install it on a hard disk if you have one.

6. STORING AND RETRIEVING SAVED SCENARIOS

6.1. Saving Scenarios in Files

At the end of the answer screen of each program function, you will be

prompted whether you would like to save the data (scenario) you just used

for your answer, in a file. The default entry for the prompt is "N", meaning

No. If you do want to save this data, enter "Y" at this prompt. The program

will prompt you for a name of the file where you wish to save this data. The

file name is limited to 6 characters in length. After you enter the file

name and press <ENTER>, your data is now saved in a file for retrieval

later. You are now placed back in a fresh screen of the program function

type you just saved. Currently, upto 10 data files can be saved for each

program function. An attempt to save more than 10 files will be refused with

an error message.

6.2. Retrieving Saved Scenarios

After you select, in either the Buyer or the Owner menu, the function you

wish to use, you will enter a File menu. The file menu allows you to

retrieve saved files. To start fresh, simply press <ENTER>. The file menu,

by default, highlights a new (or fresh) scenario. However, if you have saved

scenarios in files earlier, you can select a saved scenario by highlighting

the scenarioyou wish to retrieve and then pressing <ENTER>. The program

function screen displayed contains the saved input values. To peruse through

the data, simply press <ENTER> successively and navigate through your saved

file. At the end of the answer screen, you will be prompted whether you wish

to save this scenario. If you have made any changes while perusing that you

wish to store, save the scenario again. Otherwise press <ENTER> at the save

prompt. The default answer of "N" will not re-save(nor destroy) your old

data file.

6.3. Deleting Saved Scenarios

Since no more than 10 scenarios (data files) can be saved for each program

function, you will eventually need to delete saved files. At the file menu,

press <DEL> key. This will bring you into the Delete mode of operation which

will be highlighted at the top of the screen. The only way to exit the

Delete mode and return to regular operation is by pressing the <DEL> key

again.

Once in Delete mode, each time you select a file from the menu and press

<ENTER>, the data file will be deleted. When you have finished, press <DEL>

again to return to regular operation.

7. GUIDELINES APPLICABLE TO ALL FUNCTIONS

The following items are features of the design of the software program.

7.1. The program is menu driven and has the hierarchical structure as shown

below:

-------------

| Header |

| Screen |

-------------

--------------| Top |--------------

| | Menu | |

| ------------- |

| |

------------- -------------

| Buyer | | Owner |

| Menu | | Menu |

------------- -------------

| |

------------- -------------

| File | | File |

| Menu | | Menu |

------------- -------------

| |

------------- -------------

| Program | | Program |

| Functions | | Functions |

------------- -------------

The key to navigate up the hierarchy is the <ESC> key. For example, pressing

<ESC> 3 times in succession while in a program function will bring the user

to a box asking whether he wants to quit the program. The header screen is

bypassed on the way up the hierarchy.

7.2. Default Field Entries

Some field inputs (i.e places where user has to enter data) are

restrictive. For example, attempting to enter ABC in a field where user is

requested to enter an interest rate will not be accepted by the program.

Some field entries have default values already filled in. To accept the

default value, press <ENTER>.

In addition, some fields also have range inputs. If the user enters a

value outside the range, the values will appear as entered, but the cursor

will not move to the next field. Replacing the invalid value with a valid

value will allow the cursor to navigate the screen again. Hence, an entry of

either 55 or -3 or 0 on a field requiring the user to enter the term of a

loan in years will halt the data input process until a valid value (range 1

to 40 in most cases) is entered.

7.3. Field Sensitive Help Messages

There are field-sensitive help messages at the bottom of each function

screen. These messages change with the field that the user is currently

navigating. The input requests are fairly self-explanatory, but any

confusions should be addressed by the help message below. Further

clarifications, if needed, should be available from this user manual.

7.4. Error Messages Popup

Some field entries may be invalid as a group, even though the individual

entries may appear within valid ranges. In such a case, a box containing the

error message will appear in the middle of the screen. If you are using a

color monitor, the box will be red(text) on black(background).

7.5. Special Purpose Keys F1 and F2

After you enter the relevant data, you will see an answer screen. If you

are using a color monitor, the screen will be white on green. In all answer

screens that have tables after calculations, context-sensitive help is

available by pressing the F1 key. Pressing any key other than the F1 key

will make the help screen disappear. You can switch back and forth from the

data entry screen and answer screen using the F2 key. Pressing the F2 key

will enable you to review the answers in light of the data you entered.

After you have examined the answer screen, pressing any key will take you

back to a data entry screen containing the last entered data.

7.6. Calculations on Adjustable Rate Mortgages

Making a decision based on adjustable mortgage rates depends strongly on

the performance of the index on which the loan is based. Since the index

cannot be accurately predicted, the program allows you to choose a time

period in the recent past which will resemble (in your judgement) the index

variation over the next few years. The variation in the most common

adjustable rate indices is graphically represented in this manual. For

example, if you think that the variation of the index of your loan will

mimic the period from 1975 to 1985 over the next ten years, enter 75 and 85

at the History Start and History End field prompts for adjustable rates

respectively. Note that it is only the pattern and not the historical rate

itself that will be used by the program in its calculations. At the end of

the historical variation, the interest rate remains constant for the rest of

the duration of the calculations. Hence the interest rate in the 11th

(and 12th) year in this example will be the same as the rate at the end of

the historical variation i.e 10th year.

7. The worst case scenario in an adjustable rate mortgage is the index rate

rising rapidly over time. You can simulate this scenario by entering an

arbitrarily large figure for the index value, provided you have a lifetime

cap on the interest rate of your loan. The calculations will then adjust

your interest rate from the start rate upto the cap, realizing your worst

nightmares in a hypothetical manner.

8. EXPLANATION OF PROGRAM PROMPTS

Each individual program will prompt you to fill in some information which it

will use in its calculations. The entries to be filled in are self-

explanatory and there is a help prompt for every entry at the bottom of the

screen. However, the prompts are explained for clarity below.

Adjustment period: The time period between successive changes in your

interest rates is known as the adjustment period.

Bottom Ratio: The sum of principal, interest, taxes and insurance charges per

month(PITI) is called the Housing Expense. The ratio of the sum of Housing

Expense and other monthly debt payments to the Gross Effective Monthly

Income is known as the Top Ratio. If your Housing Expense is $1000 per

month, monthly debt payments are $200, and your pre-tax monthly income is $4000 per month, your top ratio is

1200/4000 = 0.30.

What can be considered as monthly debt varies from state to state but in

general the debt should consist more than ten monthly payments. If your debt

is not quite monthly e.g installments, lenders have their own methods to

calculate monthly debts. Call a mortgage lender to determine their specific

rules.

Choose index (menu): The Smart Homeowner can handle adjustable rate

mortgages with the indexes listed below.

(a) 6 month treasury bill

(b) 1 year treasury bill

(d) 3 year treasury bond

(e) Prime rate

(f) 6 month Certificate of Deposit(CD) rate

(g) 11th district cost of funds rate

The program has built in monthly history data of the above indexes from 1970

to 1990, and hence allows history (start and end) inputs within this period.

The one exception is the 11th district cost of funds, which is a more recent

index. The data on this index is from 1982 to 1990 only.

The default start and end history data are the starting year and end year of

the monthly data known to the program. If you change the value to be outside

this range, the cursor will not move to the next field.

***It is not that important if your loan is tied to an index not listed

above. As explained above, it is only the historical pattern over a certain

time period that will be mimicked to evaluate your loan. Hence, if (in your

best guess) you think that your index for the next (say) 10 years will

follow the pattern followed by (say) 3 year treasury bond between 1972 and

1982, enter 3 year treasury bond as your index. ****

Current index value: The index value determines the adjustment of your

interest rate. Your interest rate is usually the index value plus a fixed

percentage(margin) unless your rate is shielded by maximum adjustments or

maximum rate caps.

History end: This value is the ending year from which your estimated

interest rate will be calculated based on the variation in the index value

ending at this year (Please see above).

History start: This value is the starting year from which your estimated

interest rate will be calculated based on the variation in the index value

starting from this year (Please see above).

Home equity percentage sufficient to eliminate PMI: Lenders allow

the cancellation of the PMI insrance premium when this percentage figure has

been reached in terms of the equity of the homeowner. Usually this figure is

20% and hence is the default.

Income tax rate: The income tax rate is the average percentage of your

income that is used to pay income taxes. For federal taxes, this percentage

varies from 28% to 33% based on your income. When combined with state income

taxes, this figure can rise to 30% - 40% for states with higher state income

taxes.

Insurance: The insurance field in the program refers to hazard insurance

which most lenders consider mandatory to protect your home from natural and

accidental hazards. The premium for such insurance ranges from 0.1% to 0.6%

of the loan amount annually. In California, the average is 0.35% which is

the default value.

Interest rate cap: This is the highest interest rate that you would ever pay

over the life of the loan. This rate protects the consumer in the event that

the index value skipes upwards. If your loan has no such upper limit, press

<ENTER> to accept 0 as the default, or enter a very large number.

Loan assumption fee: There is usually a fee associated with changing the

borrower. Sometimes it is charged as a percentage of the mortgage balance

(points) or as a multiple of the monthly payment. You need to arrive at an

amount to enter into this field.

Loan-to-Value ratio (LTV): This is the ratio of the amount of the mortgage

loan to the appreciated value of the house. Lenders use this ratio to

evaluate risk. For example, a house valued at $100,000 with a mortgage loan

outstanding of $80,000 has an LTV of 80%.

Margin: The margin is the difference between your interest rate and the

index value that your loan is tied to. The margin remains constant over the

life of the loan and is set by the lender at origination time.

Max adjustment per period: This value is the maximum percentage an interest

rate can rise during the adjustment period. If there is no limit on this

value, press <ENTER> to accept 0 as the default value, or enter a very large

number. In such a case, the interest rate will mimic the index value after

the first adjustment from the starting rate.

Monthly debt: Monthly debt usually considered are ones with more than 10

monthly payments still due. Car payments, alimony and child support

payments, credit card balances are all taken into account.

Monthly homeowners dues: For dwellings with common areas shared by other

homeowners, there usually exists a monthly homeowners dues. This is most

common for townhomes and condominiums where such dues pay for maintenance

and upkeep of the complex.

Opportunity cost of money: There is a time value of money, due to

investments available, and inflation. Your input should reflect the

percentage return you could earn on your money conservatively(i.e in a bank

or money market instrument) or aggressively(i.e stocks, bonds etc.). For

example, if bank CDs are in the 6-7% range, enter 6.5 for a conservative

decision on the buy or rent scenario. Alternatively, if you believe that you

can earn in the 10 to 12% range through the stock market, enter 11 for an

aggressive decision on the buy or rent scenario.

Prepayment penalty: Some loans have prepayment penalties specified in their

loan documents. Hence, if a loan is fully repaid before the end of the loan

term, the lender can assess a penalty charge. Sometimes this charge is a

multiple of your monthly payment, sometimes it is a percentage of your

outstanding balance, and other times it is a flat processing fee. You need

to arrive at an amount in $ to be entered in this field.

Private Mortgage Insurance (PMI): This insurance is usually required by

lenders when the borrower cannot make a down payment of 20% of the value of

the home. The objective is to protect the lender against loss. The yearly

premium for this insurance is about 0.5% of the loan balance, which is the

default value.

Property tax: A property owner owes taxes to the county or state based on

the value of the home. These taxes vary from 0.5% to 1.5% of the home value

annually. In California, the average is 1.025% which is the default value.

Starting interest rate: The starting interest rate is the initial

interest rate paid on an adjustable rate mortgage. This rate is usually set

lower than prevailing interest rates in order to attract consumers. The

starting rate is adjusted after a certain time period(adjustment period). If

the starting rate entered is higher than the sum of the margin and the index

value, the interest rate will be adjusted to the sum of margin and index

value after the initial adjustment period.

Tax Shelter per year: A number of states offer tax benefits to renters. For

example, California offers a tax credit of $60 to a (filing tax as) single

taxpayer. For this case, enter 60 in the field. If this benefit is in the

form of deduction, you will need to arrive at a value of amount saved per

year by renting.

Top Ratio: The sum of principal, interest, taxes and insurance charges per

month(PITI) is called the Housing Expense. The ratio of the Housing Expense

to the Gross Effective Monthly Income is known as the Top Ratio. If your

Housing Expense is $1000 per month and your pre-tax monthly income is $4000

per month, your top ratio is 1000/4000 = 0.25.

What can be considered as part of the gross income varies from state to

state but in general the principal salary along with other verifiable income

with at least a two year history is taken into account. Call a mortgage

lender to determine their specific rules.

Usable savings: The amount of savings you can afford to prepay towards

principal on your mortgage loan. If this amount exceeds the amount required

to reach the required equity, the program will display the exact amount

needed.

9. PROGRAM FUNCTIONS

9.1 HOW MUCH HOME CAN I AFFORD ?

9.1.1 Introduction

This function allows you to determine the home buying power that you (or

your) family possesses. Once you have an idea of how much home you can

afford based on your savings/income/debts, you can start researching the

prospects of buying an affordable home. You do not need to bid on a dream

home and find that the lender disqualifies you for the loan amount. The top

and bottom ratios suggested in the function are approximate. You may wish to

contact a mortgage broker to confirm whether these ratios are accurate for

banks in your area.

Subjective criteria in your ability to obtain a loan includes your past

credit history, judgements or liens, or foreclosure on a previous property.

The function cannot take such factors into account.

9.1.2 Assumptions in calculations

- PMI is assumed as required if the 20% down payment is not met by the

borrower.

9.1.3 Answer screen

The answer screen outlines the maximum loan available to you, which along

with your savings will allow you to purchase your home. In the event that

you purchase this house, the monthly breakdown of home related expenses is

listed. If PMI is required, it is denoted at the bottom.

9.2 SHOULD I RENT OR SHOULD I BUY ?

9.2.1 Introduction

This function allows you to determine whether you should buy the house you

want to live in or simply rent it. In some areas of the country, a home

costs a lot of money, with no guarantees that it's value will appreciate as

rapidly as in the past few years. In such cases, it makes more sense to rent

the house instead of buying it. Renting has far fewer "headaches" to the

occupant, since maintenance is usually provided by the owner. However, in a

majority of cases, assuming that home prices will keep rising, buying a home

may be the most profitable investment you will make.

9.2.2 Assumptions in calculations

- Property taxes, insurance and maintenance costs remain constant over the

term of the loan

9.2.3 Answer screen

The answer varies by the time horizon. If you are thinking of buying and

selling after (say) 10 years, the choice field tells you whether buying is

advisable, and the amount of money you would save over the 10 year period if

you made the right choice. The last two fields calculate your break-even

rent i.e. what rent would make the decision to buy cost exactly as much as

the decision to rent over the time horizon.

9.3 WHICH LOAN SHOULD I CHOOSE ?

9.3.1 Introduction

This function allows you to compare two loans. Due to variation in

origination fees of two loans, the lower interest rate loan may not be the

better one. Similarly, the loan with the lower APR is better only if the

loans are not repaid earlier than their term period. If you are thinking of

moving to another house in (say) 5 years, it is difficult to choose the

better loan over this time horizon. This function will evaluate the relative

desirability of the two loans over their loan terms. Since a significant

amount of interest charges is saved if the loan term is reduced, any

comparison of loans with different terms will tend to favour the loan with

the lower term. Use the "how much home can I afford ?" function to determine

if you qualify for the lower term loan.

9.3.2 Assumptions in calculations

- none

9.3.3 Answer screen

The answer screen displays the relative costs of the two loans over yearly

time period horizons. For each loan, the amount paid and the outstanding

loan balance is displayed. The difference is then calculated based on these

amounts, as well as closing costs on the loans. All figures are adjusted to

Present Value terms.

9.4 LOAN PAYMENT TABLES

9.4.1 Introduction

This function allows you to preview the payment characteristics of your loan

either monthly or yearly. You can also print the loan tables if you are

connected to a printer. The function will help outlay your housing expenses,

tax related mortgage deductions as well as being a yardstick to compare

different loans.

9.4.2 Assumptions in calculations

- none

9.4.3 Answer screen

The answer screen displays the interest paid for the month(or year), the

principal paid for the month(or year) and the total payment for the month(or

year), which is the sum of the first two values. The interest and principal

charges paid to date is also displayed in the cumulative totals columns. The

outstanding loan balance after the payment for the month(or year) is also

displayed.

9.5 SHOULD I ASSUME EXISTING LOAN ?

9.5.1 Introduction

Loans are sometimes assumable, which means that the lender will permit a new

borrower to replace an old borrower for the same loan. These loans are

popular during times of high interest rates, where a prospective buyer can

assume an existing loan at a lower interest rate instead of taking out a

fresh mortgage with higher interest rate. The seller also has a bargaining

tool to make the sale.

9.5.2 Assumptions in calculations

- none

9.5.3 Answer screen

The answer screen displays the relative costs of the three loans in

consideration i.e assumable mortgage, new second mortgage and the

alternative new first mortgage, based on yearly time horizons. If the tax

and inflation adjusted cost of the new first mortgage is higher than the

sum of the cost of assuming the existing mortgage and the new second

mortgage, then the choice field would say ASSUME. Otherwise it would say NEW

FIRST. The profit over the time horizon if the lower cost option is chosen

is displayed on the far right.

9.6 TRUE INTEREST RATE ON MY LOAN ?

9.6.1 Introduction

The true interest rate on your loan varies with the time period you

hold the loan and the loan origination fees paid up front. A loan held for

the full term has a true interest rate called the Annual Percentage

Rate (APR), which takes into account administrative charges in addition to

points. However, if you pay off the loan earlier than the term, you will

incur a much higher interest rate than the APR. This function will allow you

to evaluate the interest rate you would incur over the entire range of

yearly time horizons.

9.6.2 Assumptions in calculations

- The maximum rate on an adjustable loan (cap) is not taken into account in

the calculations for an adjustable rate mortgage.

9.6.3 Answer screen

The answer screen simply displays the true interest rate incurred over the

yearly time horizons upto the term of the loan. The true interest rate at

the loan term horizon is the APR.

9.7 SAVINGS IF I PREPAY MORTGAGE

9.7.1 Introduction

Substantial financial savings can result if you partially prepay your

mortgage towards principal during the early years of the loan. Because of

the high outstanding loan balances in the early years, a major chunk of the

mortgage payment goes towards interest charges on the loan. Prepayment

towards principal can end your mortgage loan years earlier than your loan

term. This function helps you determine the amount of prepayment you iwll

need to make if you want to end the mortgage by a certain time frame. For

example, a good way to save for your child's college education would be to

aim to pay off your mortgage right before he is ready for college. Your

mortgage amount can then be continued to him as a monthly college expense.

9.7.2 Assumptions in calculations

- this function is designed for fixed rate mortgage loans only

9.7.3 Answer screen

The answer screen displays the extra payment towards principal each month or

the extra payment towards principal in a lump-sum prepayment that will be

necessary to end the mortgage in the range of years upto the term of the

loan. Based on your budget, you may wish to outlay a financial planning

strategy based on this function.

9.8 SHOULD I REFINANCE ?

9.8.1 Introduction

During periods of low interest rates, the popularity of refinancing

increases on loans that were originated with higher interest rates

previously. The old loan is repaid using a new loan freshly borrowed at the

prevailing low interest rate. The origination costs of the new loan is

recovered through lower monthly payments as long as the borrower holds

onto the home longer than the break-even period. This function allows you to

determine whether you should refinance your existing mortgage despite its

origination costs.

9.8.2 Assumptions in calculations

- none

9.8.3 Answer screen

The answer screen lists the decision that would incur lower costs over the

time horizon of the loan with longer term. The savings gained with the

correct decision is displayed at the far right.

9.9 SHOULD I PREPAY TO REMOVE PMI ?

9.9.1 Introduction

Preventive Mortgage Insurance (PMI) is often required when the homeowner's

equity in the home is less than 20%. It is usually a fixed monthly premium

collected by the lender. When the equity in your home rises above 20%,

lenders usually allow you to cancel the insurance policy. This function

allows you to decide if you shhould prepay your savings towards principal in

order to create your equity beyond 20% and thereby save on the insurance

premium. In general, this practice is more beneficial when home prices are

stagnant, since a rise in home value leads to rise in your equity stake in

your home.

9.9.2 Assumptions in calculations

- The function is designed for fixed rate mortgage loans only.

- The monthly premium is assumed constant over the time period when

insurance is required.

9.9.3 Answer screen

The answer screen explains the decision that saves money by comparing the

savings if money is invested with the savings in PMI premium savings if

money is paid towards mortgage principal. The screen calculates the number

of months it would take before PMI can be removed for both cases.

9.10 SHOULD I TAKE OUT A HOME EQUITY LOAN ?

9.10.1 Introduction

Homeowners often face the need to borrow more money, perhaps for educational

or remodeling uses. In such a case, the homeowner can borrow off his home

equity and take out a 2nd mortgage(or a home equity loan) or may choose to

refinance his existing mortgage into a larger 1st mortgage, if interest

rates are low. This function compares the two choices and calculates the

better decision from a financial point of view.

9.10.3 Assumptions in calculations

- none

7.10.4 Answer screen

The answer screen compares the costs incurred by the 3 loans, existing 1st

mortgage, new 2nd mortgage and larger new 1st mortgage, on a yearly basis,

after adjusting for taxes and present value terms. The better choice is

displayed for the yearly horizons, along with the savings generated if this

choice is exercised.

9.11 SHOULD I SELL OR RENT MY HOME ?

9.11.1 Introduction

There comes a time when you decide to move to a larger home or to another

neighborhood or city. Then you will have to decide between renting the home

you have or to sell it. If home prices appreciate rapidly, it may be in your

interest to hold onto it as a rental property. There may be greater costs

though for maintaining the rental if you relocate far, and intangible

"headaches" that you will be facing. This function will determine which

choice would be better from a financial point of view.

9.11.2 Assumptions in calculations

- Property taxes and insurance percentages and maintenance costs do not

change over the time horizon used in the calculations (10 years)

9.11.3 Answer screen

The answer screen simply displays the profit generated by renting the house

over the yearly time horizon and then selling it. Since the profits are

calculated for a 10 year time horizon, the trend in the profits over the

time horizon determines the correct choice. A statement at the bottom of the

screenindicates what you should do for maximum profit.

9.12 PRIVATE REVERSE MORTGAGES

Reverse mortgages are still in their infancy, hence the program functions

included in the software may be only a fraction of the types of reverse

mortgages available. As these mortgages get more popular and better defined,

IEG Consultants may provide other common functions in later versions of the

software. Please consult lenders or library references regarding the

administrative aspects of reverse mortgages.

9.12.1 Introduction

Reverse mortgages are a recent innovation, where a home-rich, cash-poor,

usually elderly homeowner is paid, usually at regular intervals until he no

longer resides in the house. The loan is then considered due. A number of

lenders in the private sector offer uninsured reverse mortgages where the

loan balance at the end of the loan is a percentage of the present value of

your home. This percentage is referred by lenders as the Loan-to-Value

ratio. This functions amortizes private uninsured reverse mortgages. If you

are thinking of taking out a reverse mortgage, this function allows you to

preview your advances and loan balance finances.

9.12.2 Assumptions in calculations

- this function is designed for fixed rate reverse mortgage loans only

9.12.3 Answer screen

The answer screen displays the monthly income, the interest and principal

owed to the lender and the outstanding balance on the loan each month. Based

on expected appreciation of home value, the homeowner;s equity in the home

is also displayed for each month.

9.13 FHA/HUD REVERSE MORTGAGES

9.13.1 Introduction

The United States Department of Housing and Urban Development (HUD) operates

probably the most popular reverse mortgage existing today, through the

Federal Housing Administrative agency (HUD). The program is very flexible in

terms of choice of advances, but has some restrictions based on age and

certain limits on home value. This function amortizes FHA insured reverse

mortgages. If you are thinking of taking out a reverse mortgage, this

function allows you to preview the combination of possible advances and

their financial implications.

9.13.2 Assumptions in calculations

- assumptions in calculations are based on guidelines published in Federal

9.13.3 Answer screen

The answer screen displays the characteristics of the types of advances

chosen by the homeowner, the interest and principal owed on the loan and the

outstanding loan balance.

10. APPENDIX

This section contains the graph of historical variations of the various

indices that are used for simulating adjustable interest rate mortgages. For

the chosen index and the time period, the adjustable mortgage calculations

will mimic the variation in the manner shown in the relevant portion of the

graph.

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